SECURE Act 2.0 Is On Its Way!

SECURE Act 2.0?Is On Its Way!?Does This Affect Me As A Federal Worker?

?The simple answer to this question is a resounding YES!?Absolutely. The real question is “How?”

?The SECURE Act 2.0 is based upon its predecessor, the “Setting Every Community Up for Retirement Enhancement” Act of 2019. The SECURE Act 1.0 was a bipartisan supported bill that was directed to help people create more flexible and accessible retirement plans. Amongst many of the provisions was pushing up the RMD’s from age 70 ? to age 72, and allows 401K (not available in the TSP) plans to offer annuities. Allowing annuities was a huge step, as it allows investors nearing retirement to lock in their gains while continuing to reap the benefits of market gains.

?Now, there is a sequel to the SECURE ACT, SECURE 2.0! The House’s version of the SECURE Act 2.0, was passed almost unanimously in the House on March 29 2022, and is now headed to the Senate. Although the Senate’s version differs from the House’s Bill and those differences will have to be ironed out, a final version is expected to pass and be signed into law this year.

?A hefty portion of Secure 2.0 is dedicated to the private and commercial sector such as requiring employers “auto-enroll”?their employees at a contribution rate towards their 401k of 3% annually and increased each year until a 10% threshold of annual salary has been reached This, by the way, is one of those differences in versions between the House and Senate Bill. The House voted to make this mandatory, the current Senate Bill does not include this as compulsory for employers. ?

?However, another groundbreaking aspect is the Catch-up provision 401k where contributions for ages 62, 63, or 64 from the current $6,500 annual max to $10,000.?And - this is the crux of the matter – all catch-up contributions will be done ONLY as a Roth Contribution. ?This clause includes Federal employee’s “catch-up" contributions to their TSP.

?As a Federal Employee, you have a choice to put away earnings into your TSP as a regular contribution which defers tax payments until retirement, much like an IRA account. Alternatively, you can contribute your earnings at nearly 4x the amount above the capped civilian level of $6,000 in the form of a Roth to your TSP. In doing so, you are paying taxes now at your current tax rate on that contribution, but gains thereafter in your Roth TSP will be free and clear of taxes when you retire after age 59 ?.?

The Federal employee would still have the choice on normal contributions or the first $20,500, but after age 50, any contributions made as catch-up would be specified as Roth TSP contributions.?

Certainly, there are some advantages Roth TSP versus a standard TSP contribution if you expect to be in a similar tax bracket from other investments following retirement, then a Roth payout will not add to your taxable income. However, one thing to keep in mind when it comes to Roth accounts – including the Roth TSP - is the 5-year hold rule. The money contributed as a Roth TSP would not be available for distributions until after 5 calendar years. This is something to consider when considering your retirement plans and the accessibility you will have to your cash in the early part of your retirement.

Something to keep in mind is the advantage of also setting up your own personal Roth IRA account. If you open a personal Roth IRA, you are not capped from making the allowed contributions to your personal account of $6,000, even if you maxed out on your Roth TSP.?In setting up a personal Roth IRA earlier than 5 years from retirement, you would be able to roll your Roth TSP at retirement into your Roth IRA and in doing satisfy the 5-year hold faster.

Another important item to consider that the SECURE Act 2.0 introduces is raising the age for RMD’s (Required Minimum Distributions). Currently you are required to take your RMD’s from your TSP monies beginning at age 72 upon retirement from the Federal Government. Under the House proposed bill, RMD’s wouldn’t start until age 73, and in 2029 would be raised to 74, and age 75 in 2032. The changes would be effective for those who have reach?age 72 after December 31, 2021.

Understanding the key components of the upcoming Security Act 2.0 and using it to diminish the taxes you will incur as you hit retirement can work to your benefit if you plan ahead.

In general, it is always a good idea to work this out with a financial advisor who understands Federal Employee Benefits, which are quite different from the average private sector employee, so that your retirement is indeed maximized on not only growth objectives, but minimizing taxes too.

This article was written by William Goldman, Federal Benefit Specialist, who seeks to help Federal Employees plan for a Robust Retirement.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.